Inheritance Tax/ Property Question

by **scoobymoo** on Wed Mar 11, 2009 3:49 pm

Hi

Wondering if anyone can provide some advice on an inheritance tax and property issue?

My husband's parents have a large house with a a few acres of land. It is very important to them that the house is kept in the family and does not have to be sold to pay IHT. As a way of avoiding this, they are considering turning the attic into a separate dwelling which retains access rights through the rest of the house. The estate as it stands is valued in excess of £1m. The idea is that if the estate becomes a house with a separate dwelling, the dwelling would be worth say £120k and the house only then worth say £500k because it has a flat with access rights attached to it making it less desirable. It would then have a total value of £620k instead of £1m and therefore less IHT.

As a second point, the attic dwelling will then be 'sold' to my husband and sister at market value. The parents will effectively sign the property over to my husband and sister who will then owe them the market price of e.g. £120k i.e. they become the mortgage lenders. The sister will then live in the dwelling, pay half of the 'mortgage' to the parents and pay my husband rent for his half which will go directly back to my husband's parents to pay off his half of the 'mortgage' so effectively not costing him anything. The parents will stay in the remainder of the house.

When my husband's parents pass away, he and his sister will inherit the rest of the house which will have been devalued and therefore hopefully no or low IHT. The sister and family will become the main occupiers of the house paying rent to my husband for his half of it.

I'd be really grateful if anyone could give any advice on 1) if this is a valid way of avoiding high levels of IHT 2) if there might be any implactions on our current mortage/ finanical situation/ taxes etc of 'owning' the second property 3) the possible pitfalls of the longer term joint asset that is rented by one of the co-owners from the other

Many thanks

by **Arnold Aaron** on Wed Mar 11, 2009 6:30 pm

Is the family thinking of converting the attic simply for IHT purposes, or are they intending to do this anyway?

Does anyone else live in the property? e.g. any of their children?

Can the parents afford to pay a market rental on the property if they were to simply gift it away to the children now?

by **scoobymoo** on Wed Mar 11, 2009 7:48 pm

Hi

They are in the process of converting anyway although more as somewhere for guests to stay at the moment than an entirely separate dwelling. It does have a separate bathroom and kitchen already.

At the moment, it is only the parents that live there although the sister and family are planning to move in with them in a couple of years.

I don't believe they can afford market value rent - recently seen their pension go up in smoke due to the recession and they are both in their early to mid 60's so it would probably eat up what little they have left.

Thanks

by **Arnold Aaron** on Wed Mar 11, 2009 10:49 pm

If there are other people living in the property with them, they can simply gift the property to them and as long the parents remain living there and pay at least their share of the bills etc. it is effective for IHT saving though it will take the normal 7 years to become exempt from IHT.

Some Solicitors on the forum can offer the precise details for such an arrangement.

by **Anthony Nixon** on Thu Mar 12, 2009 9:48 am

The plan you describe works, but I am not sure if it is the best way of tackling the situation.

You are right about the potential drop in value of what your parents are left with, but this will still be a transfer of value by parents which will be "on the clock" if they die within seven years.

As Arnold says, a better, and simpler, solution may be a gift of a part share of the whole house to your sister, once she and her family move in. This is still a transfer of value, taxable on death within seven years, but is specifically outside the reservation of benefit rules.

Care has to be taken over sharing of expenses, but this is reasonably straightforward.

If parents give your sister half of the whole property and give the other half to you in their wills, this provides a balance between you. If your half comes to you within a trust, you can get CGT relief for the property being your sister's main home.

One other idea to reduce value.

You mention that there are several acres. Could you parents give some of this to you and your sister now? It is likely that this will also reduce the value of the house. You need to take care with reservation of benefit (but this can be dealt with) and you won't have CGT protection for this land, but its value without the house may be fairly small.

This is well worth a thorough review with a good specialist, because this scenario offers a lot of scope for saving IHT. But the IHT solution needs to be tailored to your specific family circumstances, so that it works for all of you.

This is the sort of plan I am involved in a lot. So please do get in touch if you would like to explore this further with me.

Anthony Nixon CTA TEP Solicitor
Partner, Thomas Eggar LLP, Southampton and Chichester
anthony.nixon@thomaseggar.com
023 8083 1224

by **maths** on Thu Mar 12, 2009 2:01 pm

I am not sure of the purpose behind the sale of the flat once the house has been split. The sale will not reduce the parent's estate for IHT and will create potential CGT problems for the son who is not occupying the flat.

The reduction in the value of the parent's estate following the split and sale will also be a PET as indicated by Anthony Nixon. However, survival for 7 years thereafter will have at least reduced the parent's estate for IHT (or to some degree after 3 years due to taper relief).

As others have indicated a perhaps less messy solution, assuming your sister is to live with the parents, is to simply gift, say, 50% of the house to her [possibly more with sister in due course gifting "excess" to brother). The parents can still live there assuming they gain no benefit (broadly, sister must not contribute in excess of 50% of household expenses in order to avoid any reservation of benefit issues). This option does require an intention on the sister to reside in the house long term.

If the sister does not move in and/or moves out at a later date or herself dies (prior to parent's death) this option is not really viable.

Again, as above, the gift is still a PET requiring survival for 7 years.

As it seems the brother is not to live in the property CGT will arise on any future sale of the house following his inheritance of 50% on the parent's death. For PPR relief to apply would require in this case use of a trust under which the sister (as well as the brother) was a beneficiary which may or may not be acceptable [Anthony; did you have something else in mind here?].

Whether a 7 year term assurance is feasible to protect against an IHT charge on a PET will depend upon age and health of the parents.